Frank Quattrone Got Motorola A Sweet Deal If You Don't Believe Motorola's Numbers


Once disgraced, now rehabilitated, and always mustachioed tech banker Frank Quattrone has gotten some well-deserved congratulations for convincing Google to up its bid for Motorola Mobility from $30 to $40 despite the fact that (1) MMI was trading at $24.47 and (2) there was no other bidder. So, yay. Also his firm, Qatalyst, is getting $40mm in fees (44bps of enterprise value on a ~$9bn EV deal) for 14 days of work; co-adviser Centerview, who presumably did not come up with the plan of "try asking for more money," is getting a piddling $12.5mm.

All that and more is in Motorola's merger proxy filed today. Also in the proxy, though, are some internal forecasts from MMI - which might help explain Qatalyst's success, provide ammunition to Motorola shareholders unhappy with the price, and/or raise questions about the quality of MMI's forecasting. This table is from the summary of Qatalyst's fairness opinion:

Teeny text, yes. It's a summary of MMI's trading multiples, based apparently on the $24.47 pre-announcement trading price of the stock. Which represented 17.9x analysts' calendar 2012 EPS estimates of $1.38 or thereabouts. That 17.9x multiple was a bit of a premium to mobile comps, presumably because of expectations that Motorola would find a way to monetize its patents.

But $24.47 was only 10.6x the company's own estimates of 2012 profits. Motorola's disclosure of internal projections doesn't include bottom-line earnings or EPS numbers, but some pretty simple math tells you that Motorola had - and gave Qatalyst and Google - a 2012 EPS estimate of about $2.31, or 69% higher than Street estimates. Similarly Motorola's internal projection of 2012 EBITDA is 51% above estimates, and its internal net operating profit after taxes is 76% above estimates.

Throw MMI's actual 17.9x trading P/E on the company's internal $2.31 EPS projections, and you get an implied stock price of $41.32. So Google is under-paying for Motorola - if Motorola could only convince the world of its own EPS projections.

Which ... first of all, the disclosure of how those projections are arrived at does not exactly make you confident that they're grounded in rigorous analysis of reality:

For the period of 2011 through 2015, for which third party industry projections are available, the Company’s (A) projected smartphone revenue compound annual growth rate (“CAGR”) assumption of 19% is in line with third party industry projections, (B) projected tablet revenue CAGR assumption of 31% is lower than third party industry projections, (C) projected revenues for other product categories in the Mobile Devices business were assumed to decline in the aggregate based on management’s expectations of lower product portfolio investments and market trends for these categories, and (D) projected Home business revenue CAGR assumption of approximately 2.5% is in line with third party industry projections. ... The Company also assumed a 24% CAGR in intellectual property licensing revenue from 2011 through 2016, based on its expectation for securing licensing arrangements over that period of time. Further, the Company assumed, on an overall Company basis, stable gross margins during the period shown.

Whether or not you believe them, though, having these sorts of generous estimates can work both ways in M&A. On the one hand, if Frank Quattrone could at least pretend to take Motorola's estimates seriously, they'd give him some cover to ask Google for a $43.50 price for a company trading in the mid-$20s, without a risk that they'd laugh in his face / twist his mustache until he agreed to drop the shenanigans.

On the other hand, if he believed them, then it makes his fairness opinion more difficult. The difficulty is glossed over in the proxy disclosure, which focuses on DCFs and enterprise value multiples, where even Motorola's more optimistic numbers lead to high-$20s-to-mid-$30s valuations. (Probably fair, although the analysts' reports I've seen value Motorola mainly on P/E.) But any disgruntled Motorola investors who want to hold up Google's $40 deal for being too low - and, to be fair, there probably aren't many of them - now have a little bit of support from Quattrone and Motorola themselves.